Is Warisan TC Holdings Berhad (KLSE:WARISAN) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Warisan TC Holdings Berhad (KLSE:WARISAN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Warisan TC Holdings Berhad

How Much Debt Does Warisan TC Holdings Berhad Carry?

As you can see below, Warisan TC Holdings Berhad had RM213.3m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM87.1m in cash leading to net debt of about RM126.2m.

How Strong Is Warisan TC Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Warisan TC Holdings Berhad had liabilities of RM359.0m due within 12 months and liabilities of RM34.1m due beyond that. On the other hand, it had cash of RM87.1m and RM116.5m worth of receivables due within a year. So it has liabilities totalling RM189.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM74.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Warisan TC Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Warisan TC Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Warisan TC Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to RM377m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Warisan TC Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM16m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through RM30m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Warisan TC Holdings Berhad you should be aware of, and 2 of them make us uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.